Stock market | What is the difference between market capitalization and free float?

In the context of equity investments, a key difference is that between capitalization and free float. Market capitalization is defined as the total market value of the company. This is calculated by multiplying the number of shares outstanding by their current price. The capitalization is in practice the value that society attributes to the Stock Exchange. In fact, if it grows capitalization decreases the riskiness of the security.

The free float is instead the share of capital that is not the property of the member who controls the company. The float is the proportion of outstanding shares in the hands of institutional investors and private investors freely tradable on the secondary market. The free float is an indicator of liquidity. Even the large capitalization companies may have a modest float if their actions are difficult to liquidate. When the float is of modest size just a few small investors buy or sell their shares to cause wide fluctuations in price. The free float is only a certain percentage of capitalization. If it were 100% it would mean that all the actions that have been issued by the company are in the hands of the market and no longer property of a dominant player.

Free Float

Free Float

One last concept to note is that companies wishing to be listed should provide the market with a minimum amount of float. The so called medium cap must go public with an initial free float equivalent to 35% of the capitalization post listing. Small capitalization companies may stop at 10% of the capitalization post listing but do not go below € 750.000.

468 ad

Leave a Reply